Dow Jones Falls 530 Points as Banks Lead Fed Selling; Apple, 5 Titans Mask Market Weakness
Dow Jones futures were little changed after hours, along with S&P 500 futures and Nasdaq futures. The attempted stock market rally took a nasty turn on Wednesday after the Fed meeting. KB Home and Coinbase were late.
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The Federal Reserve raised interest rates by a quarter point and signaled just one more increase this year. Soon after, Fed chief Jerome Powell said he remains committed to fighting inflation. But he also said that tighter conditions from banking problems are taking some pressure off monetary policy.
Meanwhile, Treasury Secretary Janet Yellen, testifying before a Senate panel, dismissed a report that regulators are considering extending FDIC insurance to all deposits. On Tuesday, Yellen, Powell’s predecessor as Fed chief, signaled that regulators are ready to cover deposits more broadly in smaller banks, if necessary.
Bank stocks struggled, in particular First Republic Bancorp (FRC) and PacWest Bancorp (PACW).
More generally, the market rally attempt has been largely dependent on six megacaps: Apple stock, Microsoft (MSFT), Google parent Alphabet (GOOGL), Tesla (TSLA), Meta platforms (META) and Nvidia (NVDA). They have drifted higher in recent weeks, masking weak general breadth. apple ( AAPL ), Google and Meta shares are all actionable now, despite Wednesday’s reversals. Microsoft is just below a buy point while Tesla shares are rallying. Nvidia is significantly expanded.
Nvidia makes and Meta is on the IBD Leaderboard. AAPL shares and Meta are on SwingTrader. Microsoft and Google are on IBD Long-Term Leaders.
But even with these six megacaps, this is not yet a confirmed uptrend. Investors should be cautious.
Fat interest rate increase
The Fed raised interest rates by a quarter point to a range of 4.75%-5%, as expected. New quarterly estimates show that politicians expect the Fed’s key interest rate to end 2023 at 5.1%, which implies a further interest rate increase.
But even that trip is not ready. The Fed’s policy statement said that “some further policy tightening may be appropriate,” slightly less hawkish from earlier statements about “ongoing rate hikes.” Fed chief Powell said people should pay attention to “may” and “some”.
The Fed interest rate outlook will largely depend on the banking system. Fed Chairman Powell said bank deposits are “safe” because of the Fed, the FDIC and the Treasury. But he said it is too early to say how monetary policy will respond to bank stress.
The statement also noted that banking problems “will likely result in tighter credit conditions.” Powell said that means monetary policy has less to do.
Investors still see rate cuts over the summer, even with Powell signaling that is unlikely.
KB Home Income
KB Home (KBH) reported after closing. KBH shares rose 3% in extended trade after KB Home earnings topped views and management gave bullish guidance. Shares rose 0.4% to 36.80 on Wednesday, a day after retaking the 50-day line. KB Home stock has a 41.02 buy point in a new base after a 62% run from late September to February 2.
Darden restaurants (DRI), Commercial metals (CMC), General Mills (GIS), Accenture (ACN) and FactSet Research Systems (FDS) report early Thursday.
SEC Warns Coinbase of Potential Fees
The SEC late Tuesday issued a Wells Notice to CoinbaseCOIN, a formal warning to the cryptocurrency exchange that the regulator may take “enforcement action” for potential violations of securities laws. Coinbase said it would work normally for now.
COIN stock plunged 12% in extended trading. In Wednesday’s session, Coinbase stock fell 8.2% as Bitcoin and other cryptocurrencies sold off following the Fed rate hike.
Dow Jones Futures today
Dow Jones futures rose 0.2% relative to fair value. S&P 500 futures rose 0.1 percent. Nasdaq 100 futures were flat.
Keep in mind that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular session.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live
Stock market rally
Stock market activity was quiet until the Fed rate hike and Fed Chair Powell’s comments, then lashed out in the final two hours of trading, closing at session lows. Bank stocks were significant losers on Wednesday, falling on Powell’s comments.
The Dow Jones Industrial Average fell 1.6 percent in Wednesday’s trading. The S&P 500 lost 1.6%, with FRC shares the worst performer of the day. The Nasdaq composite gave up 1.65%. Small-cap Russell 2000, heavily weighted in financials, sold 2.9%
US crude oil prices rose 1.8% to $70.90 a barrel, up 6.2% so far this week. Copper futures, which closed ahead of the Fed meeting decision, climbed 1.2%, its fifth straight advance.
The 10-year government yield fell 11 basis points to 3.5%. The 2-year government rate fell 20 basis points to 3.98%. Gives extended losses in the last hour of the stock market.
The US dollar fell sharply to its lowest levels since early February, extending a losing streak.
ETFs
Among growth ETFs, the Innovator IBD 50 ETF ( FFTY ) fell 1.3%, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) lost 1%. The iShares Expanded Tech-Software Sector ETF ( IGV ) fell 2%, with the MSFT stock a core component of the IGV. VanEck Vectors Semiconductor ETF ( SMH ) fell 0.6%. Nvidia stock is a great SMH holding.
ARK Innovation ETF ( ARKK ) reflected more speculative stock stocks, falling 4.8% and ARK Genomics ETF ( ARKG ) lost 4.3%. Tesla stock is a large holding across Ark Invest’s ETFs.
The SPDR S&P Metals & Mining ETF ( XME ) retreated 2.2% and the Global X US Infrastructure Development ETF ( PAVE ) fell 2.1%. The US Global Jets ETF (JETS) fell 2.3%. The SPDR S&P Homebuilders ETF ( XHB ) gave up 1.7%. The Energy Select SPDR ETF (XLE) fell 2.1% The Health Care Select Sector SPDR Fund (XLV) 1.5%.
Bank shares
The Financial Select SPDR ETF ( XLF ) fell 2.3%. The SPDR S&P Regional Banking ETF ( KRE ) fell 5.7% after 5.8% on Tuesday.
FRC shares and PACW shares, among many KRE holdings, plunged 15.5% and 17% respectively. First Republic could get government support to facilitate an investment or takeover, Bloomberg reported Tuesday. PACW stock said Wednesday it gave up on a capital increase and raised $1.4 billion in liquidity from Atlas SP, owned by Apollo Global Management (APO). While bank deposits may be “safe,” as Powell said, bank shareholders can still take big losses or be wiped out.
Top five Chinese stocks to watch now
Market rally analysis
The attempted stock market initially reacted well to the Fed rate hike and Chairman Powell’s comments, but sold off hard towards the end.
The S&P 500 briefly broke above its 50-day line, but reversed lower to just above its 200-day line. The Nasdaq Composite hit 12,000 before retreating.
The Dow Jones reversed back below the 200-day mark. The Russell 2000 fell sharply, well below the major moving averages.
Losers led gainers by nearly 3-to-1 on both the NYSE and Nasdaq. Breadth has been a concern throughout the market rally attempt.
Nvidia shares rose slightly on Wednesday, while Apple, Google, Meta and Microsoft shares fell and Tesla fell modestly. But over the past few weeks, these six megacaps have driven the S&P 500 and Nasdaq. But the Invesco S&P 500 Equal Weight ETF ( RSP ), which first approached its 200-day line this week, fell 2.25% on Wednesday to its worst performance in four months. Meanwhile, the major Nasdaq 100 turned lower, but after hitting its best levels in nearly seven months. The Direxion NASDAQ-100 Equal Weighted Index (QQQE) fell 2.1%, back below its 50-day.
The market often has a second-day reaction to Fed meetings that reverses the first move. But the Fed-led selloff could continue. This is still just a market rally attempt. Look for a follow-up day to confirm the new uptrend.
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What to do now
The experiment in the stock market has shown some promising hints at times, but it remains divided, volatile and news-driven. Until the banking crisis is well in the background and the market shows broad progress, investors should be cautious.
Investors can have modest exposure, provided their positions perform. But don’t let the losses mount.
There is nothing wrong with waiting for a confirmed market uptrend to start going off the rails.
Don’t try to force the issue. Prepare for the next sustained market rally by building your watch lists.
Read The Big Picture every day to stay in sync with market direction and leading stocks and sectors.
Follow Ed Carson on Twitter at @IBD_ECarson for stock exchange updates and more.
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200-Day Average: Last Support Line?
